Data#3 blames market changes for revenue decrease

Data#3's total revenue, product revenue, and services revenue for the first half of the 2014 financial year have all suffered as a result of increasing competition and changes in some partner incentive programs.

Data#3 has blamed the "competitive nature of the market and changes in some partner incentive programs" for its 2014 half-year financial results ended December 31, 2013 (1H14).

The business technology solutions provider has reported that its total revenue compared to the previous corresponding period (pcp) was down 1.8 percent to AU$399.1 million, with product revenue decreasing by 1.7 percent to AU$332.7 million, and services revenue decreasing by 2.3 percent to AU$65.1 million.

Data#3 managing director John Grant said the company was disappointed with results, as it was not able to achieve budget as planned.

"We were on plan until December, but, as is the unpredictable nature of today's market, some forecasted deals slipped into the second half and we came in short," he said.

The company also reported that product gross profit was down by 11.7 percent to AU$28.7 million due to weaker software sales in Western Australia compared to the first half of the 2013 financial year. However, Grant said this decline was expected, given the pcp's benefit from the Fiona Stanley hospital contract.

This was offset by the strong growth in Victoria, which was underpinned by contributions from services. Despite this, services gross profit decreased by 1.3 percent to AU$28.8 million as the services mix changed slightly.

Grant also noted that staff costs during the 1H14 increased, reflecting both the increasing cost of doing business and the need to retain capacity at competitive levels in all locations.

During July 2013, the company faced a major restructure that saw internal staff numbers end slightly below pcp. In the first half of the 2013 financial year, there were 686 internal staff members, but by the end of the first half of 2014, there were 680. Instead, Data#3 increased its contract numbers by 7 percent.

"It is difficult to make substantial changes to our cost structure, particularly those that offer leverage in growth-oriented environment," Grant said.

"We have certainly driven them down where we can through a number of rounds of fine tuning of staffing levels and major restructure in July, but we believe that further large-scale cost reductions would be more damaging than beneficial at this stage. We are more focused on driving the top line in the knowledge that small gains in revenue can deliver substantial increases in profit."

Grant also said the July restructure was designed to align with customers' needs for hybrid IT, a combination of on-premises, outsourced, and cloud solutions.

"The benefits of these wins will start to flow in the second half, and our pipeline remains strong albeit still taking more time than we'd like," Grant said.

But Data#3 is not the only company feeling the pinch. Oakton took a similar restructure approach to cut costs where it expanded its operations in India and reduced the numbers locally. In fact, the company said its purpose-built 24/7 operation in Hyderabad, India, will soon have the largest staff numbers of all operating locations.

During the 1H14, Oakton recorded that the share of total production at its Hyderabad site increased to 25 percent.

By the end of 1H14, there was 1,106 total staff — up 39 from the pcp — which included 115 contractors. But of those, on-shore staff were "marginally reduced", while an additional 82 staff to its India operation took staff numbers up to 283.

The IT service provider announced a net profit of AU$4.1 million for the 1H14 — a 9.5 percent decrease on results from the previous corresponding half-year period. Revenue was also down 3.3 percent to AU$81.1 million.

"Our mature offshore capability, deep specialisation, and project/managed service engagement approach are now enabling a shift to a service integration and solution delivery as a service business model," said Neil Watson, Oakton managing director and CEO.

"This is becoming increasingly important as many cloud-based business and technology services emerge and require careful integration and operation."